New York appellate court keeps VRDO lawsuit going

The New York Supreme Court Appellate Division denied the appeal of several banks seeking to invalidate whistleblower claims they rigged the variable-rate market for their profit.

Tuesday's decision keeps the trial process rolling along, progress the accused banks were hoping to halt with their interlocutory appeal, which is an appeal made before a case is actually decided.

The appellate decision affirms the March decision by the trial division that the lawsuit brought under New York’s false claims act sufficiently alleges violations of that law by the defendant banks to avoid being dismissed.

The Appellate Division said the defendant banks or their subsidiaries, which include JPMorgan Chase & Co., Citigroup, M&T Bank Corp., Merrill Lynch & Co. and Morgan Stanley Smith Barney, had failed to demonstrate fatal flaws in any of the several legal avenues in which they sought to have the case tossed out.

This lawsuit and similar ones filed in Illinois, Massachusetts and California all stem from Johan Rosenberg, a Minnesota-based municipal advisor, who said he discovered a “robo-resetting” scheme after his own analysis led him to suspect banks were not properly resetting the interest rates of variable-rate demand obligations, costing issuers millions of dollars. He originally filed his lawsuits under the name of a corporate entity called “Edelweiss Fund.”

The stakes are high in New York, where the alleged damages total some $374 million. The banks have maintained in various court filings they did nothing illegal.

Among the contentions made in the effort to dismiss was that VRDOs issued via conduit issuers shouldn’t factor into the suit because private borrowers rather than government entities were responsible for the payments. The Appellate Division didn’t give the idea any more traction than the earlier decision.

“False claims are actionable if the state provides any portion of the funds used to pay the false claims,” the court stated in its decision. “The complaint sufficiently alleges that a portion of the funds the conduit borrower received came from the state. That the state’s money passed to defendant M&T Bank Corporation through private VRDO borrower entities does not make the government any less its source. By issuing conduit bonds, the state ‘made the funds available,’ thereby ‘providing’ money within the meaning of the New York False Claims Act.”

Banks have had only limited success in attacking the lawsuits to this point, winning one notable decision in Massachusetts when a judge there Rosenberg's lawsuit was blocked by the public disclosure bar, a legal standard that exists to prevent whistleblowers from filing lawsuits supported by information that was already known to the public.

Rosenberg’s legal team is appealing that finding, and it is expected to be argued next month.